How mutual funds work
What is a fund?
Funds allow investors to pool their money together, which a fund manager will then invest on their behalf. The manager is responsible for choosing investments for the fund and tries to grow investors’ money by spreading it over a range of company shares, bonds etc.
Unit trusts, offshore funds and open-ended investment companies (OEICs) can all be referred to generically as funds.
Why invest in a fund?
More investment opportunities
Pool your money with other investors to take advantage of investment opportunities more easily than if you bought the individual assets yourself.
Managed by experts
Fund managers use their knowledge, experience and research to help your money grow and provide you with an income, if required.
Spreading the risk
Invested across a number of different companies, you’re not relying too heavily on the fortunes of any one company.
Risks of investing in funds
However, there are a few things to consider, as well.
- The value of funds can go down as well as up, so you may get back less than you invest
- Funds are medium to long-term investments; so you need need to be prepared to invest for at least five years
- Investing isn’t for everyone, and depends a lot on your personal circumstances and attitudes to risk
It takes time, experience, knowledge and skill to work out which fund could be the one right for you. Here’s what you need to consider along with your personal circumstances (like how much risk you’re willing to take).
- Age of the fund - Do you want a fund with an established track record or get in early with a new fund launch?
- Size of fund - This indicates the fund’s popularity and past success at attracting investors. However, some funds can be so large it’s difficult for the fund manager to run it. A small fund is sometimes easier to manage.
- Fund manager tenure - Consistent fund performance often relies on a fund manager having managed it for some time. But watch out—star performers can change jobs.
- Independent ratings - Companies such as Morningstar, Standard & Poor’s and Moody’s provide independent ratings for funds’ performance, creditworthiness and consistency of management.
- Charges - Look closely at all the fund charges—are the ongoing charges excessive, are there penalties for withdrawing your money?
Differences between funds and other investments
- Immediate diversification
- Less risk than if you were to hold individual shares or bonds
- No transaction costs with funds on our platform
How would you like to invest?
Show me a few ideas
Tell us your risk preference and we’ll give you a couple of fund options to consider.
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Browse a list of our experts’ favourite funds.
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Use our powerful tool to search and filter the thousands of investments on offer.
These guidance tools are not a personal recommendation in respect of a particular investment. If you need additional help, please speak to a financial adviser. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals.
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Remember, the value of investments can go down as well as up so you may get back less than you invest. It’s important to understand that pension transfers are a complex area and may not be suitable for everyone. Before going ahead with a pension transfer, we strongly recommend that you undertake a full comparison of the charges, features, and services offered.